Companies and their boards face a growing array of risks—strategic, cyber, reputational and financial—in addition to the risk of disruption. To gain a director’s perspective on the evolving governance landscape, Deborah (Deb) DeHaas, vice chairman, chief inclusion officer and national managing partner at the Center for Board Effectiveness at Deloitte US, spoke with Richard (Rick) H. Lenny, the non-executive chairman of Information Resources Inc. board of directors and a member of the boards of directors of McDonald’s Corp., Discover Financial Services, Conagra Brands Inc. and Illinois Tool Works Inc.

Deb DeHaas: With the growing demands on boards of directors, where should they focus their attention?

Richard Lenny

Richard Lenny: The board’s No. 1 priority should be to deliver superior shareholder value over the long term. Directors are elected by the shareholders and, as fiduciaries of the company, this is what investors expect of the board, and it’s the reason they invest in a company.

What can make this a challenge is the ongoing tug of war between focusing on growth and the increasing demands in the name of “better governance.” Obviously, boards must practice good governance; this is nonnegotiable. Practicing good governance is necessary, but this alone is insufficient to deliver superior shareholder value. With so many issues facing the board, boards must avoid the pitfalls of responding to the latest headline and maintain their focus on the critical issues and opportunities facing their companies.

Deb DeHaas: Given this situation, do we need a new governance model?

Richard Lenny: No. However, I do believe that strong discipline and leadership are required by the board chair, the CEO and, if the chair and CEO positions are combined, by the lead director to ensure that the board spends the right amount of time on the right topics.

This is more than just having the right topics on the agenda; it’s also having these topics addressed at the right level of depth. Entrusting greater responsibility to the board’s committees is one way to avoid overloading the board’s agenda. A deep dive on the key issues facing the board can oftentimes be more appropriately handled at the committee level. Committees consist of people who are best positioned to address these topics, have access to the appropriate company resources and can devote the necessary time. Given the calls for greater transparency and disclosure, revising the committees’ charters to reflect these additional responsibilities is a good example of appropriate disclosure.

Deb DeHaas: There are continuing calls for greater diversity on boards. What do you think boards will look like five years from now?

Richard Lenny: It’s imperative that board diversity must improve both in terms of representation and in terms of diversity of experience and of thought. By the very nature of business, and the people moving into leadership positions and starting to populate boards, in five years’ time we’ll see boards that are much more diverse in both areas.

Representation on the board is the “mechanics” of diversity. It’s easy to take the skills matrix, check the boxes and conclude that the board’s work is done. For example, there’s a risk when boards recruit someone who excels in a particular area just to fill a gap. When this topic comes up, all eyes turn to the expert, but when any other topic comes up, all eyes turn away from that person.

What’s far more important when building a board is creating the right dynamic and the ability of the directors to work well together, particularly in challenging times. The board needs to represent a great diversity of thought, be able to disagree without being disagreeable and have the appropriate balance of skills and capabilities to address all of the issues with which it contends.

Deb DeHaas: The push for greater disclosures continues. How are boards responding?

Richard Lenny: There is a misguided belief that the more one asks for, the better one will understand things. More disclosures aren’t better; better disclosures are better. Disclosure and transparency are also in the eye of the person asking for it; often when you give people what they asked for they’ll still say it isn’t enough.

This entire issue requires great discipline on the part of organizations and their boards. Boards are being pushed to disclose more, but they can’t do this in any way that might jeopardize the organization’s competitive position. So when boards and management push back regarding more disclosures, it’s not because they are anti-disclosure; it’s because they are concerned about providing some competitive insights that others would be very keen to better understand.

One solution, while being mindful about fair disclosure, is for the board, management or the lead outside directors to meet with institutional shareholders to discuss what the organization is doing and why. This type of dialogue between the company and its investors is better than trying to cover every request for greater transparency in a document.

Deb DeHaas: What are the tough issues that directors need courage to address?

Richard Lenny: There are a couple of them. One is the company’s capital structure and choices around capital structure, particularly given the influence and impact of activists. And by the way, boards need to determine how and when to defend the company against activists. They also need to know when to work with activists because it goes both ways; it never hurts to listen and there are times when it makes sense to have the right level of discussions and engagement.

To your question, boards need to make tough decisions around capital structure, major mergers and acquisitions, succession planning, board composition and turnover—these are tough issues that directors need to confront and have the leadership and courage to want to confront them.

Executive compensation is another tough issue that is front and center. It makes for great headlines, but if a company has a pay-for-performance philosophy—and most companies espouse one—then it must also have pay for performance in practice. This means that when the shareholders do very well, management should get paid, and proxy disclosures notwithstanding, this takes courage.

Deb DeHaas: Given the accelerating pace of disruption in the market, do directors have a solid enough understanding of these threats?

Richard Lenny: If the board’s No. 1 one role is to enable and encourage management to pursue a growth agenda and deliver superior shareholder value over the long term, then the board must have a keen understanding of the markets in which the company competes, its competitive position within these markets and whether the right executives are in the right roles for the company to succeed.

Simply asking what might disrupt our business will result in a lot of discussion, but usually produces very little insight. A better approach, and one more boards are adopting, is to spend much more time on strategic planning, succession planning and talent management, all of which are key to remaining relevant. For example, strategic planning used to be a once-a-year exercise; boards would review and approve the annual strategic plan and one of its key responsibilities would be satisfied.

Having management provide an update at various board sessions on one of the key strategic issues ensures that the strategic plan is no longer a once-and-done exercise. A strategic plan needs to be a living vehicle so that the board maintains a strong market-oriented focus. While this approach won’t necessarily identify all of the disruptors, the more the organization and management focus externally, the greater the likelihood that they will have an insight into what could potentially become a disruptor.

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Deloitte’s Insights for C-suite executives and board members provide information and resources to help address the challenges of managing risk for both value creation and protection, as well as increasing compliance requirements.